SNB Gauges Bubble Risks as Euro Crisis Danger Recedes

After more than two years of targeting three-month Libor
between zero and 0.25 percent, coupled with a currency ceiling
to keep the euro region’s debt crisis at bay, President Thomas Jordan and his colleagues are increasingly focused on the
domestic fallout. The Swiss property market, fueled by cheap
mortgages, is experiencing its biggest boom in two decades.

The SNB, which delivers its quarterly decision tomorrow,
has warned of overheating in the real-estate market and earlier
this year pushed the government to require banks to hold more
capital to temper it. That initial step on its own may not be
enough to prevent a bubble from forming, say economists
including Reto Huenerwadel at UBS AG in Zurich.

“There’s a risk that they will add to their current macro-prudential measures,” he said. “The key is whether there will
be a change in the language that they use. They’re going to
prepare people for something, and then go to the government.”

Raising interest rates isn’t an option for the SNB as long
as it wants to maintain the cap of 1.20 per euro, which has kept
the Swiss franc at least two centimes below that level for
almost eight months. All 22 economists surveyed by Bloomberg
News predict no change in the SNB’s benchmark interest rate.
Officials will also maintain the cap at the current level, all
respondents to that question said.

Indispensable Cap

The SNB will publish the decision at 9:30 a.m. in Bern,
along with new growth and inflation forecast. Jordan will
explain the outcome at a 10 a.m. press conference.

The franc traded little changed at 1.2217 per euro at 12:27
p.m. in Zurich today. Against the dollar it stood at 88.74
centimes.

Last month, the SNB president termed the cap
“indispensable,” citing falling consumer prices and the risk
of the euro area’s debt crisis intensifying again. Even so, he
said that the European Central Bank’s decision to cut its
benchmark interest rate to a record low of 0.25 percent created
a “complex situation” for the SNB.

Since 2008, mortgages outstanding to Swiss private
households have increased 25 percent and apartment prices have
risen 27 percent. The UBS Swiss Real Estate Bubble Index is at
its highest level since 1991.

The boom is part of a wider European trend. Apartments in
Germany’s largest cities may be overvalued by as much as 20
percent, the Bundesbank said on October. In the U.K., Bank of
England Governor Mark Carney took action last month to restrain
house-prices by ending incentives for mortgage lending.

Capital Buffer

In Switzerland, the government-mandated buffer imposed at
the SNB’s request currently requires banks to hold 1 percent
extra capital on their mortgage-related assets, and can be
increased to as much as 2.5 percent. While SNB Vice President
Jean-Pierre Danthine said last month that expectations of its
effectiveness “must stay realistic,” he wouldn’t exclude
additional steps.

“Further regulatory measures could become necessary,”
Danthine wrote in an opinion piece in Die Volkswirtschaft
magazine.

The number of apartments for sale for more than 1 million
francs ($1.1 million) doubled since 2008, while the total amount
on offer rose only 10 percent, according to property consultancy
Wueest & Partner. Building permits for new lodgings rose 20
percent in the first quarter of this year, compared with the
same period in 2012, government statistics show.

Crisis Repeat

The SNB says this increase isn’t justified by fundamentals.
Private debt, primarily mortgage loans, stands at a record 170
percent of annual output, according to the SNB, which wants to
prevent a repeat of the property-market crisis of the 1990s. At
the time, a collapse in house prices tipped the economy into
recession and caused the failures of banks including Spar- und
Leihkasse Thun and Solothurner Kantonalbank.

“Existing measures to restrict credit allocation are
having some effect, but we think regulators will require even
more steps,” said Oliver Adler, head of economic research at
Credit Suisse Group AG in Zurich. “The SNB will ask the
government to raise the buffer at the beginning of next year.”

David Marmet, economist at Zuercher Kantonalbank, also says
more regulation could lie in store.

“If the market doesn’t cool further, then I think maybe in
the spring they will take further steps,” he said.